Why Self-Fund?

For the past two decades, health care costs have been the fastest growing component of the corporate budget. There are many causes of this double-digit rise, including new costly medical technology, personal lifestyle habits, cost shifting from government programs and the aging of the population. There are also many strategies employers have implemented to reduce the impact of run-away costs. Smart employers have combined cost management strategies with self-funding to hold benefit costs to a minimum.

Over 65% of U.S. employers effectuated some form of self-funding for their medical benefit program in 1991. That percentage has increased steadily over the past decade as employers have realized the strong positives self-funding offers in helping control costs.

More and more companies are turning to self-funding to avoid unnecessary charges and costs and to gain control over health care expenditures. Through self-funding, the employer is in control of the benefit dollars, the benefit design and the reserves. The result is savings in benefit payout.

The rationale of employers in implementing self-funding makes sense. That is to lower the ongoing fixed costs associated with the benefit program and pay only for claims experienced by their employees. Since over 80% of employees and dependents experience low dollars in claims, the savings for these employees are great.

For those employees and dependents with catastrophic claims, the other 20%, employers purchase stop loss insurance to minimize risk. Stop loss insurance for self-funded benefit programs is inexpensive compared to premium rates for fully insured benefit programs and protects the employer from high dollar individual and group claims, therefore eliminating the risk of catastrophic claims.

Why Self-Funding Saves Benefit Dollars?

The charts below display that for each dollar spent for self-funded plans versus insured plans, self-funded plans concentrate more into paying employee claims. To translate this savings, for a benefit program with 80 employees with $240,000 of claims payments, the average amount paid by self-funded plans to pay these claims is $288,000 while insured plans average $375,000. This is an average savings of 23% for self-funded plans.

The following table displays important differences that lead to the savings:

Insurance Plan	Self-Funded Plan
Required to Pay Premium Taxes Required To Establish Reserves For Claims Not Yet Submitted Required To Establish Reserves For Unexpected Contingencies High Operating Overhead And High Administration Fees Of Insurers Insurer Keeps Dollars Unspent Higher Average Claims Payout Per Employee	Not Required To Pay Premium Taxes Reserves Are Retained By The Employer   Stop Loss Covers Unexpected Contingencies   Third Party Administrators Average Fees Is Lower Than Fees Of Insurers Employer Keeps Dollars Unspent Lower Average Claims Payout Per Employee